Does paying off your car loan reduce your car insurance?

Is insurance more expensive for a financed car

Owning a car can be pretty expensive. Not only do you have to factor in your car loan repayments (if you have one), but there’s also the cost of:

• Registration

• Fuel

• Maintenance

• Depreciation.

Not to mention car insurance, which can cost you upwards of $1,500 a year. In some cases, your car loan and car insurance will be linked, and paying off your car loan can also open the door to lower car insurance premiums.

Let’s look at how.

How much does car insurance cost?

Car insurance can be expensive. According to the Australian Automobile Association’s (AAA) Transport Affordability Index for December 2019, comprehensive car insurance costs an average of $24.87 per week across the eight capital cities - that’s almost $1,300 a year.

And that’s just an average cost too. You could easily be paying more: Melbourne, for example, is the most expensive city for car insurance, costing over $1,700 per year on average.

So comprehensive car insurance accompanying a car loan can be a big extra cost you need to factor into your annual budget.

Does car insurance cost more if you have a car loan?

Depending on the Insurer then yes, car insurance can sometimes cost more if your car is under finance, aka a car loan. Why? Simply put, data shows that financed car owners are more likely to make a claim than those who own the car outright. This is because those who finance their car might be younger, might drive more frequently or buy newer vehicles instead of used ones.

As an example, we compared two quotes from Insurance Provider A: for a Mazda 3 in good condition where the only field we changed was whether the car was financed or not:

• Financed car comprehensive insurance cost: $1044.15 per year

• Non-financed comprehensive insurance cost: $806.35 per year

In this case, not having a financed car could save you $200 per year in insurance costs.

We also compared two quotes from Insurance Provider B: for a new Mazda 3 where the only field we changed was whether the car was financed or not:

• Financed car comprehensive insurance cost: $1028.73

• Non-financed comprehensive insurance cost: $920.25

In this example not having finance on your car could save you $108 per year.

Does paying off your car loan reduce your car insurance?

Conversely, paying off your car loan can reduce your car insurance payments, but it won’t necessarily. Different insurers price based on different factors. Once you do pay off your car loan, give your insurance company a call so they can update their records. You may be in luck.

Other ways to reduce your car insurance premiums

If you’re still a while away from paying off your car loan, or don’t want to lower your coverage from comprehensive, then there are a number of other things you can do to reduce your premiums:

• You can drive less often, and park the car in a garage or carport when not in use

• You can install dashcams or other security devices to ward off thieves

• Maintain a good driving record and don’t claim

• Keep the car in good condition and service it regularly

• Choose a higher excess (a higher excess in the event of a claim can mean lower ongoing premiums)

• you can insure your car for market value instead of agreed value

• Have one driver on the policy

• Be over 25 (under 25s have to pay more based on accident statistics)

But the most important thing you can do to lower your car insurance premiums is to compare insurers and get quotes for different policies. This could save you hundreds of dollars - but so too could getting a better car loan.

How to lower your car loan repayments

If you have a car loan, then lowering your car repayments is essential - a car loan can charge thousands of dollars in interest on top of the cost of the car, so paying less wherever you can should be a must. There are a few ways you can lower your car loan repayments:

• Ensure you have a good/healthy credit score before applying, or when refinancing your loan

• Add a balloon payment to your car loan, which is a lump sum payment paid at the end of the term

• Pay a bigger deposit, which lowers the amount you have to pay interest on

• Have a longer loan term, which means lower ongoing repayments, but a bigger payment overall

But if you’re currently paying too much on your current car loan, the most immediate way you can lower your car loan repayments is to choose a lender with a low interest rate. loans.com.au offers super-low fixed car loan rates that are among the most competitive in the market.

Speak to a loans.com.au car lending specialist today to learn more about our car loans, or compare our car loan products to see which one might suit your needs.

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